Year: 2024

UBS sees AI revenue rising from $28B in 2022 to $420B in 2027

The year 2023 saw the largest US technology stocks, often referred to as the “Magnificent seven,” outshining the broader market, with gains ranging from 48% to an impressive 249%, while the S&P 500 Index closed with a 24.2% price return.

Notably, many of these companies play pivotal roles in the advancement and widespread application of artificial intelligence (AI). As investors contemplate the sustainability of 2023’s AI-driven successes in 2024, UBS remains optimistic about the enduring investment case for AI and related entities.

While concerns may arise regarding potential headwinds, such as a slower practical implementation of AI or a strategic shift in investor portfolios away from the previous year’s leaders, UBS believes that the investment outlook for AI will not only persist but also strengthen in 2024.

The integral role of these technology giants in the ongoing development and dissemination of AI positions them favorably to continue driving innovation, efficiency, and profitability in the evolving landscape of the tech sector.

“When we launched our AI industry revenue estimates last year, we expected growth from USD 28bn in 2022 to USD 300bn by 2027. That translated into a compounded annual growth rate of 61%,” said the Chief Investment Officer Americas at UBS.

“But we now upgrade our estimate further, with the greatest risk being that we are too conservative. We now forecast industry revenues of USD 420bn by 2027— a 72% annual growth rate and a fifteenfold increase in just five years.”

Analysts argue that the potential factors influencing the 15x growth in AI revenues from 2022 to 2027 are a demand for AI that exceeds initial expectations and improved transparency regarding company expenditures on AI infrastructure.

While these numbers may appear ambitious, they align with historical trends seen in earlier phases of the computing cycle, including mainframe, PC, and smartphone shipments.

“When it comes to expressing these views in portfolios, we believe the semiconductor and software industries (with a combined market cap of more than USD 10tr) are the best ways to ride the strong and improving visibility for AI,” analysts added.

© Reuters. Officials investigate a burnt Japan Coast Guard aircraft after a collision with Japan Airlines’ (JAL) Airbus A350 plane at Haneda International Airport in Tokyo, Japan January 3, 2024. REUTERS/Issei Kato

By Maki Shiraki, Daniel Leussink and Lisa Barrington

TOKYO (Reuters) -Japanese authorities said on Wednesday a passenger jet that collided with a Coast Guard turboprop at a Tokyo airport had been given permission to land, but the smaller plane had not been cleared for take-off, based on control tower transcripts.

All 379 people aboard the Japan Airlines (JAL) Airbus A350 managed to evacuate after it erupted in flames following Tuesday’s crash with a De Havilland Dash-8 Coast Guard turboprop shortly after landing at Haneda airport.

But five died among the six Coast Guard crew who were due to depart on a flight responding to a major earthquake on Japan’s west coast, while the captain, who escaped the wreckage, was badly injured.

Authorities have only just begun their investigations and there remains uncertainty over the circumstances surrounding the crash, including how the two aircraft ended up on the same runway. Experts stress it usually takes the failure of multiple safety guardrails for an airplane accident to happen.

But transcripts of traffic control instructions released by authorities appeared to show the Japan Airlines jet had been given permission to land while the Coast Guard aircraft had been told to taxi to a holding point near the runway.

An official from Japan’s civil aviation bureau told reporters there was no indication in those transcripts that the Coast Guard aircraft had been granted permission to take off.

The captain of the turboprop plane said he had entered the runway after receiving permission, a Coast Guard official said, while acknowledging that there was no indication in the transcripts that he had been cleared to do so.

“The transport ministry is submitting objective material and will fully cooperate with the … investigation to ensure we work together to take all possible safety measures to prevent a recurrence,” Transport Minister Tetsuo Saito told reporters.

The Japan Safety Transport Board (JTSB) is investigating the accident, with participation by agencies in France, where the Airbus jet was designed, and Britain, where its two Rolls-Royce (OTC:RYCEY) engines were manufactured. In Canada, where the Coast Guard Dash-8 was originally built by Bombardier (OTC:BDRBF), the TSB safety agency said it would also take part.

The JTSB has recovered the voice recorder from the coast guard aircraft, authorities said.

POLICE INQUIRY

Meanwhile, Tokyo police are investigating whether possible professional negligence led to deaths and injuries, several media outlets, including Kyodo and the Nikkei business newspaper, said.

Police have set up an investigation unit at the airport and plan to interview those involved, a spokesperson said, declining to say whether they were examining any suggestions of negligence.

Parallel air crash investigations have raised concerns in the past over tensions between civil safety investigations, which rely on open discussion of errors to help improve safety, and police-led inquiries, which are designed to apportion blame.

“There’s a strong possibility there was a human error,” said aviation analyst Hiroyuki Kobayashi, who is a former JAL pilot.

“Aircraft accidents very rarely occur due to a single problem, so I think that this time too there were two or three issues that led to the accident.”

A notice to pilots in force before the accident suggested that a strip of stop lights embedded in the tarmac as an extra safety measure to prevent wrong turns, was out of service, according to a copy of the bulletin posted by U.S. regulators.

“This is something the investigators will look at,” said U.S. aviation safety consultant John Cox.

In a statement on Wednesday, JAL said the aircraft recognised and repeated the landing permission from air traffic control before approaching and touching down.

All passengers and crew were evacuated within 20 minutes of the crash, but the aircraft, engulfed in flames, burned for more than six hours, the airline said.

The Coast Guard aircraft, one of six based at the airport, had been due to transport aid to regions hit by Monday’s earthquake of magnitude 7.6 that has killed 64 people, with survivors facing freezing temperatures and prospects of heavy rain.

The accident forced the cancellation of 137 domestic, and four international flights on Wednesday, the government said.

But emergency flights and high-speed rail services were requested to ease the congestion, Transport Minister Saito said.

Michael Daniel, a former U.S. accident investigator, said investigators will be looking to make recommendations.

“The main thing is the situational awareness: what is it they would have told the pilot holding short of getting on a runway … And then what was air traffic’s understanding. Did the controller give them clearance to take off? … A lot of that information will come out when they start reviewing the cockpit voice recorder as well as the air traffic tapes.”

© Reuters. Analyst sees 15% downside risk for Nvidia stock as AI hits ‘trough of disillusionment’

DA Davidson analysts assert that NVIDIA (NVDA) plays a crucial role as a leader in accelerated computing, projecting an impressive 20% compound annual growth rate (CAGR) from 2022 levels across cycles.

Despite recognizing NVDA’s dominance in various categories, analysts express skepticism about the likelihood of consensus expectations for the out-years materializing.

They anticipate a reversion to the trend line within the next 2-6 quarters, citing vulnerability for NVDA as the hype around artificial intelligence (AI) approaches the “trough of disillusionment.”

“While we continue to believe that generative AI is the most important transformative technology since the Internet, we do not expect the same level of investment we saw in 2023 continuing beyond 2024,” analysts said in a note.

As a result, analysts initiated new research coverage on Nvidia (NASDAQ:NVDA) stock at Neutral with a price target of $410 per share, which implies a downside risk of 15% based on Tuesday’s closing price.

“Our $410 price target is based on a 35x multiple on the $7.29 of CY24 EPS for the core company and $155 for the sandbox revenue still coming to NVDA over the next 4-6 quarters. We believe the value of this sandbox could drop considerably once NVDA growth rolls over,” analysts explained.

Nvidia stock closed 2.7% lower on the first trading day in 2024 and is down a further 1.1% in pre-market Wednesday.

© Reuters. FILE PHOTO: Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., December 13, 2023. REUTER

By Howard Schneider

WASHINGTON (Reuters) -Federal Reserve officials in December launched an expansive debate about a coming turn in U.S. monetary policy, with fresh concerns voiced about how long the economy could hold up under current high interest rates and at least initial discussion about when to halt the rundown of its balance sheet, according to minutes of the Dec. 12-13 meeting.

Fed Chair Jerome Powell had laid out the broad contours of the meeting at a press conference held at its conclusion, noting that the central bank was likely done raising interest rates and expected to begin reducing borrowing costs by the end of 2024.

While the minutes did not provide direct clues about when rate cuts might commence, they reflected a growing sense that inflation is under control and growing concern about the risks that “overly restrictive” monetary policy may pose to the economy.

The document caps a year that began with the Fed still uncertain about how much harm it might have to inflict on the economy to control inflation and Powell warning of “pain” to come, but ended with inflation falling faster than anticipated and policymakers becoming increasingly hopeful that they could tame inflation while skirting the recession even staff members thought was sure to come.

Initial debate about when to stop the rundown in the Fed’s asset holdings showed policymakers edging towards reversal of a separate policy that, with less impact but in similar fashion to rate hikes, has also been restricting economic activity as part of the Fed’s battle against the worst breakout of inflation in 40 years.

“Participants pointed to the decline in inflation seen during 2023, noting the recent shift down in six-month inflation readings in particular,” the minutes said.

DIMINISHING INFLATION RISKS

The core personal consumption expenditures price index on a six-month basis through November has run just below the Fed’s 2% target. For the first time since June 2022 policymakers did not use the phrase “unacceptably high” to describe inflation, according to the minutes, while laying out reasons why they felt inflation would continue to fall.

There were still risks, with several participants saying they felt the Fed had gotten all the help it could expect from improved supply chains to lower inflation, with tight monetary policy still needed to dampen demand and new geopolitical risks possibly causing inflation progress to stall.

But participants also considered the overall risk of renewed inflation “as having diminished,” while “a few” Fed officials saw a different problem developing: That the Fed would soon confront a “tradeoff” between its dual goals of controlling inflation and maintaining high rates of employment, a sacrifice Powell has pledged to try to avoid.

That specific concern has been conspicuously absent from Fed debates in recent months, with inflation falling while the unemployment rate, at 3.7%, remains at a level many economists consider near or even below full employment.

The fact that it has now surfaced suggests a growing sense that the economy could still hit a breaking point despite the growing hope among some Fed officials that a “soft landing” from high inflation is close.

“Several participants noted the risk that, if labor demand were to weaken substantially further, the labor market could transition quickly from a gradual easing to a more abrupt downshift in conditions,” the minutes noted.

New jobs data for December will be issued Friday.

According to projections issued at the Fed’s December meeting, all but two Fed officials see the benchmark policy rate lower by the end of 2024 than it is now, with a majority of policymakers seeing it trimmed by at least three quarters of a percentage point. The target rate has been held in a range of from 5.25% to 5.5% since July.

U.S. stocks slightly pared losses following the release of the minutes but were still down for a second straight day, while the U.S. dollar added to gains against a basket of currencies. U.S. Treasury yields were little changed.

Traders of interest rate futures largely stuck to bets that the central bank’s Federal Open Market Committee would start to cut rates in March, with the policy rate seen ending the year in the 3.75%-4.00% range, 1.5 percentage points lower than where it is now.

“There is nothing in these minutes to dissuade us that the Fed will start to cut interest rates from this March onwards,” said Paul Ashworth, Chief North America economist at Capital Economics.

NO START SIGNAL YET

The minutes in fact shed little direct light on when rate cuts might commence. Participants noted “an unusually elevated degree of uncertainty” about the economic outlook, with further rate increases still possible.

But “most” felt that monetary policy was having its intended impact on inflation and would continue to do so by dampening household and business spending and pulling inflation back to target.

Coming policy decisions would be “careful and data-dependent,” the minutes said.

The Fed next meets on Jan. 30-31.

© Reuters. FILE PHOTO: People walk around the New York Stock Exchange in New York, U.S., December 29, 2023. REUTERS/Eduardo Munoz/File Photo

By David French

(Reuters) – U.S. stock indexes ended the second session of the year down again in extended profit-taking on Wednesday after a strong finish to 2023, with minutes from the Federal Reserve’s December meeting failing to shake off the funk hanging over markets.

It was the first time the benchmark S&P 500 index has started the year with two straight declines since it kicked off 2015 with a three-session skid. It is also its worst two-day result, on a percentage basis, since late-October.

The decline contrasts with the blistering run for all three major Wall Street benchmarks in the final two months of the year. The S&P 500 came within striking distance of its all-time closing high last week as signs of cooling inflation spurred investors to bet on an aggressive rate-cutting schedule.

However, investors have been cautious so far in 2024, wary of the U.S. central bank’s expected pivot to rate cuts this year and how quickly these might be implemented. While the Fed is widely expected to keep rates on hold in January, traders have priced in a 67% chance of a 25 basis point rate cut in March, as per CMEGroup’s FedWatch tool.

The Fed minutes released on Wednesday offered new insight, with policymakers appearing increasingly convinced that inflation was coming under control, with “upside risks” diminished and growing concern about the damage that “overly restrictive” monetary policy might do to the economy.

Little light was shed on when rate cuts might commence though.

“The market wanted to hear when and how much the Fed was going to drop rates, and they didn’t get that – even if it’s not the Fed’s job to do that,” said Jason Betz, private wealth advisor at Ameriprise Financial (NYSE:AMP).

“What we’re seeing play out in today’s selling maybe is a little bit of frustration with the perceived lack of transparency of the Fed.”

Betz noted that profit-taking from 2023’s gains and recalibrations for the new year were likely also factors influencing traders’ thinking.

Shares of rate-sensitive megacap stocks fell, with Nvidia (NASDAQ:NVDA) , Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) ending down between 0.7% and 4%.

The S&P 500 lost 38.02 points, or 0.8%, to end at 4,704.81 points, while the Nasdaq Composite lost 173.73 points, or 1.18%, to 14,592.21. The Dow Jones Industrial Average fell 284.85 points, or 0.76%, to 37,430.19.

Airline stocks came under pressure as a jump in oil prices, following disruption at Libya’s top oilfield, raised concerns about fuel costs. The S&P 1500 passenger airlines index tumbled 4%. [O/R]

Higher crude prices supported the energy index, which advanced 1.5%, the leading gainer among the minority of S&P sectors in positive territory.

Financials was among the sectors that traded lower, off 0.8%, with Charles Schwab (NYSE:SCHW) and Blackstone (NYSE:BX) among those pulling down the index. They dropped 3% and 4.6%, respectively, after Goldman Sachs downgraded the stocks to “neutral” from “buy.”

However, Citigroup gained for a second straight day, rising 1.1% to its highest finish since mid-August 2022, as the bank continued to benefit from a price target upgrade and an upbeat analyst report from Wells Fargo released the previous day.

The volume on U.S. exchanges was 11.84 billion shares, compared with the 12.35 billion average over the last 20 trading days.